Agriculture production took a hit of 85 million tonnes due to the 2002-2003 drought in Orissa; and the loss of livestock was about 92 million heads, in the 1999-2003 droughts. These are some of the grim numbers in Economics of droughts in India, a paper by Ghairat Khan.

While there can be differences in the estimates, what may surprise many is that the definition of drought is fraught with problems. Noting that drought is a ‘creeping phenomenon’ (Tannehill, 1947), the paper goes on to explain that drought is a shortage of water for essential needs, which for agricultural purposes relates to plant growth.

“However, it is also a relative term in that it might be considered a deficiency of water for a few weeks or months in a high rainfall area or a lack of water over several years in arid lands.”

Since every drought definition in the past has been area-specific, as duration, severity and impacts of every drought are unique, any universal definition of drought can be unrealistic, one learns.

The National Commission on Agriculture has spoken of ‘hydrological drought,’ as prolonged meteorological drought resulting in depletion of surface water from reservoirs, lakes, streams, rivers, cessation of spring flow and fall in groundwater levels causing severe shortage of water for livestock and human needs.

And, as the essay educates, ‘agricultural drought’ arises when soil moisture and rainfall are inadequate during the crop growing season to support healthy crop growth to maturity, which situation causes extreme crop stress and wilting.

Khan’s paper wraps up by suggesting a few long-term strategies such as developing drought-related database, monitoring system, engineering works, and agronomical and social interventions to minimise the impacts of future droughts.

A study of topical importance.

Monsoon options

Can capital markets absorb monsoon risk? We can explore the possibility, say G. Kotreshwar, and Rekha Arunkumar in Monsoon risk securitisation. Arguing that monsoon options could serve as special purpose vehicles (SPVs) facilitating transfer of systemic monsoon risk to capital markets, the authors attempt a conceptualisation of monsoon option contracts by defining the underlying variable in terms of millimetre rainy days (MRDs).

“Design and fair pricing of monsoon options is critical for the development of weather derivatives market in India. Monsoon options would play a role similar to the role played by temperature derivatives in the US today,” the paper notes, based on a study of historical data covering a period of 50 years (1954-2003) relating to a sample of selected meteorological subdivisions of India.

The foremost benefit of such options, in the authors’ view, is the enabling of monsoon hedging by various players on the demand side of weather derivatives market, mainly the farmers, the energy utilities, agri-businesses and insurance companies. Other benefits include the development and strengthening of insurance markets as insurers in the crop insurance business can hedge their exposure by trading in monsoon derivatives; complementing and strengthening the nascent commodity derivatives market; and the potential use of monsoon options as a new class of capital market instruments in portfolio management.

Suggested read for a rainy day.

(This article was published on July 21, 2012)
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